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TALF - Term Asset Backed Securities Loan Facility3/4/10 - It took a year, but the Term Asset-Backed Securities Loan Facility, an innovative program designed to stabilize the market for consumer loan-backed securities, has done what it was supposed to: rekindle demand and get credit flowing again.And the part of the program that supported securities backed by consumer loans will have turned a profit in the process. Since it was introduced last March, the program, known as TALF, has facilitated the sale of more than $100 billion in bonds backed by auto, student and equipment loans and credit-card debt—most of all the asset-backed deals sold in U.S. In that time, risk premiums—a measure of the cost of credit—have tightened by more than a full percentage point in several sectors, and as investor confidence has recovered issuers have increasingly been able to sell bonds without using the Federal Reserve as a crutch. The program initially met with a lukewarm welcome as investors objected to frequent rule changes and copious paperwork. It is ending amid some grumbles, too, with primary dealers complaining of stringent audits and detailed questions about borrowers. But even vocal critics concede that TALF reopened this market, where banks have traditionally packaged consumer loans and sold them on to investors as a way to recycle capital and lower the cost of credit. The Fed did it by offering buyers low-cost loans to buy new bonds backed by auto and student loans. If the loans went awry, investors could walk away from the loan and lose only a part of their initial investment. Even with this generous nonrecourse lending, the program is "highly likely" to make a profit. By limiting the program to triple-A rated securities and requiring borrowers to put up capital of their own, the bank is "very comfortable" with the risk it took on TALF, despite some criticism from a government watchdog agency. What remains to be seen is if traditional investors—pension funds and insurance companies—will stay in the market after TALF. 7/29/09 - Vornado Realty Trust, one of the U.S.'s largest real-estate investment trusts, is planning on raising between $550 million and $600 million through a bond sale that would qualify for a key government program aimed at resuscitating the commercial-property market. The potential deal, along with two by shopping-center giant Developers Diversified Realty would be among the first batch of offerings of commercial mortgage-backed securities, or CMBS, that will take advantage of the TALF program. The TALF program, introduced by the Federal Reserve in March to jump-start lending, offers low-cost financing for investors buying bonds backed by everything from credit cards to car loans. Since then, the program has helped companies including Harley-Davidson and others raise $65 billion through bond sales. But so far there have been no CMBS deals, a major concern because of billions of dollars of mounting losses in the commercial-real-estate industry. Wall Street sold $230 billion of CMBS in 2007, a record year, compared with about $10 billion last year and zero so far this year. The financing drought is threatening to cause major damage to the U.S. economy as commercial-property developers and investors increasingly are finding it hard to refinance their debt as it comes due. The collateral backing Vornado's CMBS issue likely will consist of shopping centers owned by the company, even though it is best known as the largest publicly traded office landlord in the country. 3/13/09 - After failing to sign up enough investors in time to launch the Term Asset-Backed Loan Facility early this coming week, the Federal Reserve and Wall Street are reworking the TALF program at the 11th hour. The Fed delayed the program's launch. Wall Street dealers, including J.P. Morgan Chase and Barclays, have created vehicles to participate in the TALF that would allow investors in the program to circumvent many of the restrictions laid out by the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and use some of the financial engineering that was partially responsible for the collapse of the credit markets. The Fed, eager to get what it hopes will be a $1 trillion program up and running, has blessed the vehicles because they open the TALF up to a much larger group of investors. The vehicles emerged after investors cringed at signing agreements with Wall Street firms that would facilitate the Fed's loans. They objected to the level of scrutiny that dealers would have over their books, arguing that the dealers' rules attached too many strings. Dealers were saying they take plenty of risk to facilitate the program and need to be protected in situations where the collateral or the client made mistakes or wound up ineligible. The Fed's main goal in forming the TALF is to bring to life the asset-backed securities market that effectively subsidizes loans to consumers and businesses to buy cars, pay for their educations, buy farm equipment or use credit cards. The Fed has said it could expand the TALF to include commercial and residential mortgage lending. Under the new proposal, a bank would set up a trust to buy securities with money borrowed from the Fed. The trust would then sell investors securities in the trust. Those securities would give returns similar to the TALF loan, but without the strings attached. The dealers say they could create markets for these derivative securities to trade, and a presentation by Barclays says they may be rated by credit-ratings companies and listed on the Irish Stock Exchange, a home for many CDOs. The vehicles also would make it easier for investors that aren't eligible for TALF loans to buy into the program, like investors that are restricted by their investment guidelines from using borrowed money to buy securities. Smaller hedge funds that can't vie for large allocations of deals could also buy in through these vehicles. Background TALF was initially launched last November, and the government trickled out few details about it until this February, when the program became a marquee feature of Treasury Secretary Timothy Geithner's revamped plans to stabilize the financial system. Geithner announced the program would expand from its initial $200 billion focus on consumer lending to $1 trillion, encompassing loans to investors to buy residential and commercial mortgage-backed securities. |
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